Oil independence a fantasy

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Recently, the Orange County Register published an article by Bradley Olson of Bloomberg News, titled “California may soon emerge as top U.S. oil producer.” Fifteen leases covering 18,000 acres of the Monterey Shale, a geological formation whose sweet spots stretch from Monterey County to San Francisco, were won at a Bureau of Land Management (BLM) auction by oil giant Occidental Petroleum and some smaller companies. According to EIA, the auctioned leases “could” hold 15.4 billion barrels of oil, amounting to 64 percent of all presently estimated oil reserves. Phil McPherson, CFO for Citadel Exploration Inc., indicated that the “Monterey's prospects, ‘coupled with' a favorable oil price, means that renaissance is coming to California.” It sounds like an economic boom, perhaps a balanced budget and happiness for all. Not quite so fast!

Both the EIA and McPherson's comments are hedged by words such as “could” and “coupled with.” Projections of past underground oil supplies have often been wide of the mark and prices of oil per barrel have gyrated to new highs and new lows lately. Occidental and its colleagues, likely, will be cautious before they begin to drill in the Monterey Shale. Tight oil, or hard-to-get-at oil, is costly to bring up. If the price of oil nears $70 a barrel, as it did just a short time ago, producers will reduce their enthusiasm for drilling. Many acres of federally leased land, ostensibly, home to large oil supplies, remain unloved and undrilled on by their lessees.

Contrary to the Olson article, net benefits to California and to consumers are uncertain, concerning the general economy, social welfare, environment and security.

Increased oil supplies will certainly lower our dependency on foreign oil. But oil independence is a fantasy argued by producers, I suspect, in part, to mute initiatives to open up the nation's restricted gasoline market.

Rising demand, given a return to global economic growth and continued tension in the Middle East, will generate increased U.S. exports of crude oil and oil products. Even in a down international economy, the U.S. exported almost three million barrels per day of petroleum and petroleum products in 2011. Increases in oil supply resulting from North Dakota's Bakken and Texas Eagle Ford Shale drilling have not lead to a sustained lowering of the price of gasoline. Neither has increased production or generated consensus about future supply and demand. Reasons given by economists and producers are all over the place. They include possible unanticipated production costs, uncertainty concerning demand given increased auto efficiency and slow economic growth, quality of oil, lack of pipeline and refinery capacity – a seeming fact of life in California, fear of Middle East conflict and, yes, if Senator Feinstein is correct, company hedging and supply manipulation.

The Monterey Shale leases pass through some of California's most scenic territory and some of its most productive agricultural lands. If the past is prologue to the future, Occidental will have a tough selling job to gain community and environmentalist support. Possible problems associated with new drilling technologies relate to significant use of scarce water in the drilling process and pollution. I believe the drilling issues can and will be resolved by the several nonpartisan leadership and technical working groups now in place. It's an American kind of problem. While the U.S. is not always able to respond well to complex value laden policy issues, it is among the best when it comes to solving technical difficulties. Success will be measured in terms of achieving minimal drilling risks and building public understanding as well as acceptance of likely results. As Olson suggests in the Register article, failure to succeed will result in extended legal and political action and delay oil production.

It is amazing to me that in a nation and state that expresses faith in free markets, both accept very restricted markets for fuel to power vehicles. If the Monterey Shale can be developed with sensitivity and minimal risks to the environment, fine. But why should government and the oil industry deny consumers, during its development (and the possible development of other oil fields), the right to purchase and use alternative fuels like natural gas, methanol and ethanol? While not perfect, alternative transportation fuels are safer, cheaper and environmentally better than gasoline. Their use would lessen dependency on foreign oil and increase U.S. security. Why is it that we continue to allow the market for transportation fuel to reflect near monopolistic conditions? If competition existed among alternative transportation fuels, including gasoline, the pressure on prices at future multiple choice pumps will be downward and the creation of jobs will be stimulated by reduced investment and reduced dependency on foreign oil. From an environmental, economic, security and social welfare standpoint, the U.S. and California would be winners and the benefits would be real and not a pipe dream.

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